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8/6/2019 Using Standard-Costing Systems for Control
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STANDARD COSTa budget for the
production of oneunit of product or
service
ACTUAL COSTused in the
production of theproduct or service
COST VARIANCEthe differencebetween the
actual cost andthe standard cost
COST VARIANCEthe differencebetween the
actual cost andthe standard cost
Using Standard-Costing
Systems for Control
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STANDARD COSTING
- DEFINITION
STANDARD COSTING may be
defined basically as a technique of cost
accounting which compares the standar
cost of each product or service with theactual cost, to determine the efficiency of
the operation, so that any remedial action
may be taken immediately.
The standard cost is a predeterminedcost which determines what each product
or service should cost under given
circumstances.
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The Need for Standards
Standards Are common in business
Are often imposed by government agencies (andcalled regulations)
Standard costs Are predetermined unit costs
Used as measures of performance
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ADVANTAGES OF
STANDARD COSTING
Costing procedures are often simplified.
Provides a valuable aid to management in
determining prices and formulating
policies.
The evaluation of stock is facilitated.
The operation of cost centers defines
responsibilities.
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STANDARD COSTING
- LIMITATIONS VARIATION IN PRICE
VARYING LEVELS OF OUTPUT
CHANGING STANDARD OF
TECHNOLOGY
ATTITUDE OF TECHNICAL PEOPLE MIX OF PRODUCTS
DO NOT REFLECT THE TRUE VALUE
AND EXCHANGE
BASED ON THEORETICAL MAXIMUM
EFFICIENCY, ATTAINABLE GOOD
PERFORMANCE & AVERAGE PASTPERFORMANCE
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Standard Costing: Advantages Allows managers to
use management by
exception
Provides a basis forsensible cost
comparisons
Provides a means of
performanceevaluation and
rewards for
employees
Provides motivationfor employees to
adhere tostandards
Results in morestable product
costs
Is less expensivethan actual- ornormal- costing
systems
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Criticisms Of Standard Costing In
Todays Environment Shorter product life cycles meanthat standards are only relevant
for a short time
Too much focus on cost
minimization rather thanincreasing product quality or
customer service
Automated manufacturing
processes tend to be more
consistent in meeting
production specifications.
Not defined broadly enough to
capture important aspect of
ownership
Variances are often too
aggregated. They are not tied
to specific product lines,
production batches, or to the
flexible management system
Variances are often too late to
be useful
Standard costing out of step
with the philosophy of cost
management systems and
activity-based management
Too much focus on the cost and
efficiency of direct labor
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Standard quantity:
Fabric in finished
product 11 sq. metersAllowance for
normal waste 1 sq. meters
Total standard
quantity required
per tent 12 sq. meters
Purchase price per
sq. m e te r of fa bric(ne t of purcha se
discounts) $7.75Tra nspo rta tion cost
pe r sq. m e te r 0.25ota sta n a r pr ce
pe r sq. me te r of
fabric $8.00
KoalaCampGearCompany
DIRECT MATERIAL STANDARDS
The total amount of material
normally required to produce
a finished product including
allowances for normal wasteor efficiency
The total deliveredcost, after
subtracting anypurchase discounts
Cost VarianceAnalysis
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Koala CampGear Company
DIRECT LABOR STANDARDS
S a n a r
q a n y :D r e l a o r
r e q r e p e r e n 2 hours
S a n a r r a e :
Ho r l y a e r a e $15
Fr n e e n e(20% o a e ) 3
T o a l a n a r
r a e p e r o r $18
CostVarianceAnalysis
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Direct material:
Standard direct-material
cost per tent (12 sq.
meters x $8 pr sq. meter) $96Actual output x3 000
Total standard direct-
material cost $288,000
labor:
Direct labor costper tent (2 hours x
$16 per hour) $36
Actual output X 3 ,000
otal standard
direct-labor cost $108,000
Koala CampGearCompany
The standard cost forthe direct-material
and direct-labor inputsis based upon Koalas
actual output of3,000 tents
They should incura cost of$396,000
($288,000 + $108,000)
to make 3,000 tents
StandardCostsGiven Actual
Output
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Second, the company used more fabric than the standard price.
36,400 s . meters actually used, instead of the standard amount of36,000 s . meters
Direct-material uantity variance = AQ X SP - SQ X SP =SQ AQ - SQ where
AQ = Actual uantity used
SQ = Standard uantity allowedKoalas direct- material uantity variance for June
is computed as followsDirect-material uantity variance = SP AQ - SQ
= $8.00 36,400 - 36,000=$3,200 unfavorable
Koalas direct- material uantity variance for Juneis computed as follows
Direct-material uantity variance = SP AQ - SQ= $8.00 36,400 - 36,000
=$3,200 unfavorable
What caused Koala to spend more than theanticipated amount on direct material?
Direct-Material Variances
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40,000 s .meters
purchased
$8.15 pers . meter
40,000 s .meters
purchased
$8.00 pers . meter
36,000s . meters
allowed
$8.00 pers . meter
$326,000 $320,000 $288,000
$6,000U
36,400 s .meters
used
$8.00per s .
meter
$291,200
Direct-material price variance
$3,200U
Direct-materialuantity
variance
xx x
Analysis Of Material
VariancesActualActualuantityuantityActualActualpricepriceActualActualuantityuantity StandardStandardpriceprice StandardStandarduantityuantity StandardStandardpricepricexxxx xx
Exh.
16-1
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What caused Koala to spend more than theanticipated amount on direct material?
irst, the company purchased fabric at a higher price $8.15 pers uare meter than the standard price $8.00 per s uare meter .
Direct-material price variance = PQ X AP - PQ X SP = PQ AP - SPwhere PQ = Quantity purchased
AP = Actual price
SP = Standard priceKoalas direct- material price variance for June is computed as follows
Direct-material price variance = PQ AP - SP= 40,000 $8.15 - $8.00 = $6,000 unfavorable
Direct-Material Variances
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Causes of Labor Variances
Labor variances may be caused by avariety of factors
Labor price variances usually result from eitherpaying
workers higher wages than expected ormisallocatingworkers (for ex., using skilled workers in place ofunskilled workers)
Labor quantity variances relate to the efficiency ofworkers and are usually related to the production
department
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X X X
Actual Labor Cost Standard Labor Cost
Actualhours
Standardprice
Actualrate
Actualhours
Standardrate
Standardrate
XXX
5,900
hoursused
$19
perhour
5,900
hoursused
$18
perhour
6,000
hoursallowed
$18
perhour
$112,100 $106,200 $108,000
$5,900 Unfavorable $1,800 avorable
Direct-laborrate variance
Direct-laborefficiency variance
$4,100 Unfavorable
Direct-labor variance
Analysis of Direct-Labor
Variances
Exh.
16-2
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Reporting Variances
Reporting variances All variances should be reported to appropriate
levels of management as soon as possible so that
corrective action can be taken The form, content, and frequency of variance
reports vary considerably among companies
Variance reports facilitate the principle of
management by exception In using variance reports, top management normally
looks forsignificant variances
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Causes ofManufacturing
Overhead Variances Manufacturing overhead variances may
be caused by a variety of factors The controllable variance relates to variable
manufacturing costs and usually is the responsibilityof the production department May result from eitherhigher than expected use ofindirect materials,
indirect labor or supplies orincreases in indirect manufacturing costssuch as fuel
The volume variance may be the responsibility of the
production department (inefficient use of direct laborhours) or may come from outside the productiondepartment (lack of sales orders)
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